Hey everyone! Today I have a guest post for you from Financial Panther (it's a Simpsons reference if you were wondering). He is a lawyer that paid off $87,000 of student loan debt, and also took a $50,000 pay cut to have a better quality of life. Enjoy! ~M$M
Do any internet search and I'm sure you can find articles telling you that switching jobs is a great way to increase your salary. This isn't one of those articles. Instead of getting a raise, I switched jobs and rewarded myself with a $50,000 pay cut. Yes, if making more money is the goal, then I’m pretty much a fool.
It’s not often that someone voluntarily chooses to take a $50,000 pay cut. Most people are trying to figure out ways to get a job making more money, not less. But for me, after spending three years working as an attorney at a big law firm, I was burnt out and needed a change of pace.
That isn’t to say that there’s something inherently wrong with working at a big law firm. It just wasn’t a great fit for me. This past summer, I finally made the jump, leaving private practice and going into the public sector. As you can imagine, a government job doesn't pay quite as well.
You’d think that a huge pay cut like that would mean that I’d have to drastically cut down on my lifestyle. But to my surprise, I found out that I was able to save just as much as I was saving in my previous job! And I didn’t have to change my lifestyle at all. I basically took a pay cut as big as the average salary in the US, and I didn’t even blink an eye.
Not everyone would be able to do what I did. Most of the people that I worked with got their first big paycheck and then suddenly needed to have all the nice things that came with it. Instead of spending my money on a fancy apartment and expensive clothes, I spent it all on my student loans. I coupled that by living on far less than I earned.
By the time I made the big job switch, I had wiped out $87,000 of student loans, built up a little bit of savings to my name, and most importantly, had gotten completely used to living on much less than I earned.
Being able to make a job change, just like that, was a real eye opener to me. I always understood that it was smart to live on less than you earn so that you can save more money. But it never really occurred to me that spending less than I earned also meant I'd have much more freedom to do what I wanted to do.
Living On Less Gives You Choices
When you spend less than you earn, you obviously can save more money. But a corollary is that you need much less money in order to live. You gain a ton of flexibility from this simple act.
An easy way to think about how spending less gives you choices is to think about the type of jobs you can do based on how much you need to live. If you need very little in order to live comfortably, then the entire world is yours. You can literally do anything you want. Start up a business. Work as a bartender. Or go for the highest paying, most baller job you can get. The world becomes your oyster!
Just look at Bobby. Do you think he could’ve quit his job and gone all in on this blog if he was spending a ton of money every month? <– No, I couldn't have! ~M$M
On the other hand, if you're a big time spender, by necessity, your choices will be limited. Someone spending six figures a year has to have a job making six figures a year. If you previously had 100% of the world of jobs at your disposal, you’ve now drastically cut down your choices. If you find yourself needing to make a change, your choices are either stick it out or find a similar job paying you the same amount of money. You better hope you like your job.
The majority of my colleagues got really used to the money they made. I definitely wasn’t the only person who was unhappy with my job, but not everyone could afford to switch jobs like I could. All they could do was stick it out or hope something better came along. They were tied to their paychecks. And they needed those paychecks to pay for all their stuff.
Your Income Won't Always Go Up
I think most people have a general belief that they’ll make more money in the future. That's not a bad thing to believe and it's probably true over the long term. The problem though is that there's no guarantee that your income at any particular point in time will be higher than it is today.
When most people chart their income on a graph, they probably think of it looking sort of like this:
In reality though, your income will probably look more like this:
Like the stock market, your income is probably going to trend upward over time. But it won't necessarily be a smooth ride. One year you might be crushing it. Another year, something unexpected might happen and you make much less. Maybe you’re not happy with your job. Maybe you get laid off. Or you go back to school. Or any number of things that throws a wrench in your plans.
Just because you make a certain amount now doesn't mean that you'll make that same amount next year.
It's a bumpy ride to the top. And the ability to live on less is your lifeboat. You never know what tomorrow might bring. I would never have been able to switch jobs and take such a big pay cut if I had spent like I would always make more tomorrow.
You Won’t Save More Later
Even if you're right and your income always goes up, you’re probably fooling yourself if you think that you’ll just magically start spending less later. How often have we told ourselves that we'll figure out a way to save more once we start making more money?
The problem is, money has a funny way of buying things without you even realizing it. When you were in college or grad school, you probably didn’t have that many expenses, simply because you didn't have the money.
I know when I was in law school, most of my classmates lived with multiple roommates in shabby apartments. I rented a room in a rundown, four bedroom house. We were broke students. We didn't have the money to live a baller lifestyle.
But after we received those first big paychecks, suddenly, we needed to have all the things we didn't have before. The same people who were living perfectly fine before, now suddenly needed to live in a luxury apartment in the hip part of town. They needed to try all the fancy restaurants around them. And they definitely needed to start shopping at the Whole Foods down the street.
If you think you’ll start saving more later, just remember how little you used to need, and how much you suddenly need now. It’s easy to increase your lifestyle. It’s not so easy to decrease it.
Pay Off Your Debt, Live On Less, And You'll Never Be Stuck
When it comes to the make more versus spend less debate, I'm firmly on the side of spend less. Making more money is great for sure, but if you're making a ton and spending it all, it really doesn't matter what type of money you bring in. You’ll just end up in the same position as everyone else.
I look back at a lot of the folks who I used to work with. There are people still there who I know aren't happy with the job. But they can't just switch jobs like I could. They need the paycheck because they have bills coming in from all directions – rent, student loans, credit cards, food, whatever. All they can do is stick it out or hope something better comes along. They don't have a lot of choices. They're stuck.
Take it from me – spend less than you earn and pay off your debt quickly. Do what you can to rely on as little of your paycheck as possible. Even if you love your job, you never know what the future will hold. Live on less so that you'll never be stuck doing something you don't want to do.
You don’t have to take a $50,000 pay cut like I did! But it’s nice if you can do it and not have to change a thing.